The Department of Housing and Urban Development says Texas did not provide enough chances for residents to comment on using disaster money on housing and infrastructure.
The agency, in the Nov. 10 rejection letter, also noted Texas did not update its 2003 plan to promote fair housing.
The letter was cited Tuesday by the Galveston County Daily News.
Gov. Rick Perry says the September 2008 hurricane was the costliest in Texas history and "this process should not stand in the way of assistance to disaster victims."
Perry raised concerns about funding delays, saying Texas does not plan to update its fair housing practices before February.